The SEC has filed charges against Penn West Petroleum and three of its former finance executives with accounting fraud conducted between 2012 and 2014.
Penn West (which renamed itself Obsidian Energy just two days ago) is an E&P company based in Calgary that is quoted on both the Toronto and New York stock exchanges. At the time it was one of the largest E&P operators in Canada.
The three finance executives are Todd Takeyasu, former CFO, Jeffery Curran, former VP of Accounting and Reporting and Wally Grab, former Operations Controller.
The fraud was highly sophisticated (…Not!). The three executives created manual journal entries to move cost from operating expense to capital expenses! They reclassified $40 million in 2012, $85 million in 2013 and $15 million in 2014 before the practice was halted by new management in June 2014. Penn West had some of the highest operating costs per barrel of oil equivalent among Canadian operators. After the adjustments, they were in line with most of their peers.
Via journal entry they also moved operating costs into the account for royalty payments owed to landowners (this account reduced gross revenues). This amounted to $101 million for 2012 and 2013.
Takeyasu was terminated in March 2014 and Curran in June 2014. 3 days after Curran left, the incoming CFO discovered the fraud when one of the more junior accountants raised her concerns about the improper accounting practices. Grab was terminated 5 days later.
Penn West restated its results in September 2014 and has been downsizing and selling assets ever since to try and stave off bankruptcy. In January 2016, it settled the class action lawsuits filed in the USA and Canada.
The SEC’s investigation found no personal misconduct by Penn West’s two former CEOs, Murray Nunns (CEO until June 2013) and David Roberts (June 2013-Oct 2016), who have reimbursed the company for cash bonuses and certain stock awards they received during the period when the company allegedly committed accounting violations. Prior to joining Penn West, Roberts was the COO at Houston-based Marathon Oil.
This goes to show that no amount of controls can overcome a fraud committed at the top of the company and enabled by lax oversight from the CEO’s, Internal Audit, and the Board of Directors.